Ohio Restaurants & Food Processors: Is Sales Tax on Your Menu?

When planning their SJM Steakhouse, the partners (Sally, Joe, and Mary) focused on what they thought were the critical components; their concept and target market, location, menu, décor, and capital needs. However, after a year of successful operations, they realized they had overlooked one critical item - sales tax.

Tax (especially sales tax) often seems like a pesky detail to entrepreneurs who launch restaurants and other business ventures. They often prefer to focus on the more visible (and engaging) start-up activities, and tell themselves that they’ll get back to those “pesky details” once things settle down. However, as most business owners will attest, in business, later often comes much sooner than one expects, and often when least expected and most inconvenient.

But business at “the SJM” (as it was called) was going very well, and the restaurant had developed a reputation for great food and ambience, which helped to pull in many of the office workers from the tenants in the surrounding business park--including the Ohio Department of Taxation.

One Friday evening, Natalie (a sales tax audit senior at the Ohio Department of Taxation) and several co-workers went to the busy steakhouse to celebrate her recent promotion to sales tax audit manager. And interestingly, when she picked up the tab at the end of the evening, ambitious Natalie noticed no tax had been charged. “Gotcha,” she thought to herself.

Sure enough, a week later the SJM Steakhouse received a call from Natalie’s newly appointed underling, and a few days later the formal audit commencement letter arrived in the mail. Before the Thursday evening rush, Sally called Joe and Mary to a meeting in her office—the bar. Here’s what she told them:

“The auditor’s coming in three weeks to look at all of our sales receipts since we opened. I went back and looked at a few and noticed sometimes we charged sales tax and sometimes we didn’t. Some of the servers must not know to charge tax when they ring the customers up. We’re gonna get dinged!

Also, the auditor said that we don’t have to charge sales tax on our take-out orders, but our sales receipts don’t say whether something’s for here or to-go. We’re not going to be able to prove that any of our sales shouldn’t have had tax. If we failed to charge tax even just 25% of the time, we’re looking at close to $10,000. And that’s going to be our money. It’s not like we can go back to the customers and try to collect.

What’s worse, I called our accountant, and I’m not confident he’s going to be any help. He doesn’t specialize in sales tax, and he couldn’t tell me when he last helped someone in an audit.”

As the three were contemplating their future liability a voice said “I might be able to help.” Down the bar was a man drinking an IPA. “I’m a sales tax consultant. I’ve been around the block a few times and have some recommendations.”

“You’re a sales tax consultant?” Joe asked. “It’s 3:00 on a Thursday, what are you doing here?”

“Drinkin’ . . . a beer,” said the man. After a short pause, he continued “I notice you have a register by your side entry door. Is that where your take-out orders are rung up?”

“Yes,” said Mary.

“Do you use that register for anything else?”

“No, actually we don’t. The servers are allowed to but they never do because it’s too out of the way for them,” Mary replied.

“Well, there’s your way to prove which sales were take-out. Also, do you have your equipment and seating invoices?”

“They’re in the back,” Sally said. She ran to get them and came back with two thick packets. The man flipped through them.

“The equipment invoice total is about $250,000 and the tax charge is over $15,000. That sounds very high to me. I bet you were charged tax on some expensive items that were exempt. Everything on your seating invoice was taxed. None of it should have been,” he said.

He continued . . . “Ohio is unique in that it offers eight separate sales tax exemptions for restaurants, bars, and food processors, and suppliers have difficulty adjusting their sales tax software to accommodate them. In general, under R.C. 5739.02(B)(27) food ingredients and equipment used to prepare food or preserve it is exempt, and anything use to clean the equipment is exempt too. Ohio’s manufacturing exemption, R.C. 5739.02(B)(42)(a) and (g), exempts equipment and ingredients used to make alcoholic or sugary drinks--beverages that don’t qualify as food. Ohio’s packaging exemption applies to cartons and bags you use for take-out orders and doggie bags. I notice you have some take-out menus. Those are exempt too under R.C. 5739.02(B)(35)(a). Finally, anything you provide that’s reasonably necessary for your patrons to eat here, such as the tables and chairs, silverware, condiment holders, and the like aren’t taxable because they’re used in making the sale of the meal under R.C. 5739.01(O) and are therefore purchased for resale under R.C. 5739.01(E). “

“Ka-Ching!” said Sally, “I’d say you’ve earned that beer. Can you help us out with the audit?”

“Sure can,” said the man.

At the end of the audit, Sally, Joe, and Mary were happy they’d met that man at the bar. Their liability was lower than they had initially anticipated, and they were expecting a nice refund on their equipment, seating, and other items. Best of all, they were compliant going forward and could now focus on the things they really needed to focus on, like menus and customers.

If you’re a restauranteur or have another business in the food services or processing industries, these are issues you need to consider. If you have any questions or concerns about these or other business tax issues, we welcome your questions and/or consultation requests.

Steve’s Ohio tax experience began over a decade ago at the Ohio General Assembly where he drafted the State’s tax legislation. Immersed daily in Ohio’s sales and use tax laws, Steve quickly became an expert on Ohio’s manufacturing, restaurant, oil and gas, R&D, and other sales tax exemptions, and on the taxability of data processing, cloud computing, computer, and other services. Five years later, Steve joined Big 4 firm pwc where he put his sales and use tax knowledge to practical use on a national level. Steve also worked for a global software development company where he was responsible for sales, use and other tax compliance.

Comments or questions may be submitted to this sales tax specialist by viewing any of the linked posts (below) and using the on-page "Comment" feature (or other posted contact options), subject to disclaimer at bottom of page. Additional contact options are also available on the blogger's associated Firm Profile.

Other recent “Ohio (OH)” posts by Steve Estelle, Esq.:

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